tv Options Action CNBC June 9, 2013 6:00am-6:31am EDT
money, then things. now, you stay safe. bye-bye. this is options action. tonight, apple's big moment. with wwdc timely give the stock its mojo back? dan nathan is revealing what's at stake in giving you a winning trade that makes you money for free. there may be jitters in the housing market but khouw and carter are keeping up for a rock solid trade. has general motors come too far too fast? our traders have answers to put you one step aut ahead of the next move. the action begins now. live from the nasdaq market site in new york city's times square, i'm melissa lee.
these are our traders this evening. let's get to the name everyone will be watching next week and that is apple. graemt expectations. will there be a game schanging announcement and will it -- let's get in the monday and find out. dan, what is at stake here? there's not a lot of expectations built in here. the options market is applying a 3.5% move. >> the weekly option res going berserk. today there was like 75,000 of this week, of the calls that traded. a lot are trading in the next week. options traders are trying to pick a bottom here. and it seems like from this network we heard in the last month, some really high profile people, these guys getting long here in thinking that there's really good value. i think there's expectation that the stock works over the next year without very little product info in the near term. >> and we're probably not going to get any info. this is a software conference, not a hardware conference.
it it seems the largest thing that could come from apple is a low cost phone. that's on the hardware side. >> i think we've seen some names that haven't really participated. earlier in the year, getting bought at this point, and that's mostly a story of valuation. people think this stock has just become cheap. even if the story is weak, they're still interested in buying it. if you want any examples of how high a stock can go when you have that situation, look at the pc stocks like intel and microsoft. these guys definitely don't have a great story. they have a very bad story and people are buying them because they're cheap. it's a rotation. >> let's get to our technology correspondent, jon fortt, and what to expect out of this conference. jon? >> melissa, mainly operating system upgrades, first of all, for mobile, it's ios 7, which could have a new look and feel. i'm impressed it hasn't leaked yet. old school apple secrecy. why does this matter? volume. ios 6 was downloaded to more than 100 million devices in a week in a half.
if the past is any guide, ios 7 will support every device since the iphone 4. so, retina display devices only. probably some features that won't work on anything older than an iphone 5. we'll get a new version of os 10. maybe new laptops. mac sales aren't exactly the play makers for apple right now. what else? ois cloud updates. and i cloud partnerships, we might get a streaming music service. on icloud they could do a better job making it simpler to use. streaming music service, i'm not expecting that much in terms of impact there. apple is unlikely to push things so far that the recording industry would get mad and they are not going to undermine their own healthy music business. a long shot here would be software tools opening up apple tv, its interface to developers, especially game developers. that would be big. it would imply things what they might do with hardware later in the year. >> jon, thank you.
from silicon valley. he had mentioned being bullish on apple. take a listen to what was said earlier this week about apple. >> i think apple goes to 500 bucks. it's just too cheap versus a lot of other stocks. given their cash flow engine that they have. it seems like 500 should be a fairly easy place for the stock to go to. >> now, we spent a lot of time talking about how options traders are trying to pick a bottom. would you agree, we're close to one, we have seen one? >> i don't think so. i've been pretty consistent on this. i don't think a stock like apple that had the rage that it was among the world investment community, ends the way it did, you know, last quarter. i think there has to be some form of capitulation. when we head into this meeting next week, we're not going to get anything. we're going have a few months where there is no product news. i think it could happen that way. >> the most exciting thing they talk about is an operating system, i mean, god, how do you get excited about that? but both of you guys talked about valuation. valuation has been compelling for a long time. it could stay that way for a
long time and could get more compelling. i think the interesting thing, though, from an option point of view is that call options in apple are actually really expensive. usually puts are expensive because people are buying them to hedge and calls are cheap because people are selling covered calls. that's not what the options look like in july in apple. call options in july in apple are expensive because people want to get bullish. >> there's a reason for that, too, though. there's a lot of cash on the balance street. that is going to depress volatility on the puts. you are increasingly just dealing with a bucket of cash, which has a volatility of zero. one other quick point. bear in mind that other handset makers like the htcs of the world, they can trade at high single digit multiples for a long time. the reason is because it's a business that's in favor sometimes and then you're out. it doesn't deserve to have a market premium, i don't think. >> dan, you're bullish? >> well, here's the thing. i'm personally not bullish. i think you're going to have a better opportunity to buy it. seems like the investment world is universally convinced that the bottom is in.
so, taking that quote from jeff, he thinks 500 is easy. if you own it here and a lot of people do and you want to look to add yield to that long position, i think there's an opportunity to do it, focused on their q-3 earnings which should fall in late july, looking at august options. >> dan's got an interesting trade on apple that costs nothing but offers huge leverage to the upside. he's doing a one by two call spread. here's how it works in this structure. you buy one call and finance that purchase by selling two higher priced calls. of the same expiration. you want the stock to go to the short call strike. since you are short more calls than you are long, always do this against stock that you own. you can think of this trade as an override in which you use that money to buy a call spread against a long position. dan? what's the trade? >> we are calling it apple juice over here. here's the thing. the stock, i priced this when the stock was $441 today. i was looking at august. that's going to catch the q-3 earnings. if you looked at the august 475 500 one by two call spread, you can get that on for even money. you'd be buying one of the
august 475 calls for $10 and selling two of the august 500 calls at $5 each, for about $10 total. so, this is how you make money. with the stock between 441, where it closed today, and 475, that call strike that you're long, you just have the gains of the stock, okay? between 441 and 500, you additionally have the gains of the stock. that would be 13.5%. if the stock trades at 500 or higher on august expiration, you're going to make an extra $25. the distance between that call spread that you own. that's an extra 5.5% yield. almost gets you to the unchanged mark on the year, 532. it's a levered way to get some yield, if you do have this strong upward movement. >> this is a great trade and taking advantage of the fact that the calls are kind of big here. you have get to sell that high premium. i really like trades like this. i like situations where you can sell premium around stocks that you own. if it rallies, you gear your upside there, up to a level where you probably be comfortable selling the stock. and look what happens. you're not committing any
additional capital to the trade. if it falls, you can look at other ways to try them, as well. >> this is essentially free. this works best with the stock going to 500. i actually think that's a bridge too far, given that 460, 470 has been the range since, well, since january earnings announcement, so, that may be a little bit too far. neat strategy, though. we like these. >> let's wrap this up with a little stocks versus options, shall we? want to buy apple? you better have a lot of dough. 100 shares will run you more than $44,000 at this point. dan's one by two call spread, which you can use only against a long position, cost nothing to put on and could knelt you a gain of more than 5%. not bad. let's move onto our next option. here, it is a company that seems to be doing everything right these days. gm making a return to the s&p 500 this week. the treasury unloaded another 30 million shares of gm. the stock has been on a huge run, with shares up 60% in the last year. mike, what do you make of this run here? >> obviously, the new gm has really capitalized on something most people think of as the fuel
that's been driving the housing rally, which is low interest rates. low interest rates help promote the purchase of cars. there was a very big lag. we went into the credit crisis. people weren't buying cars. the fleet age is basically at an all-time high. what you are having is now car affordability, much like home affordability, has really come into, you know, has come into favor here. what's happening here, we're seeing a big uptick in car purchases. that's really driving the story. that, plus the fact you deal with a company that has much better product, a better balance sheet. and they are trading at a discount to toyota. one common way to look at multiples. enterprise value versus trailing -- they are at less than eight and toyota is 11 times. this is a situation, as you see people start to go back to buying suvs, which are higher profit vehicles, that's going to be a strength. one final point. everyone buying tesla, you know, tesla only has a couple hundred million in cap backs. this company has $8 billion in cap backs.
they produce the volt. i find it hard to imagine they're not going to be able to build some technology that's going to be competitive and scaleable. >> firing on all cylinders. i love when mike makes a funny. >> any reason to be bullish on general motors, but this makes a lot of sense and this strategy is really good. >> mike is selling a put spread. let's open that play book. it's a bullish strategy. you sell one put and buy a lower strike put of the same expiration to protect yourself. the goal here, you want the stock to trade above the short put strike on expiration. that way, you can keep the profits you took in. should the stock fall, you will see losses, but they are capped at the strike of the put you put. mike, walk us through. >> i'm looking to sell premium. i'm looking to sell the july 34 put spread. i'll sell the july 34 puts for 8 cents and collecting 30 cents, that's 30%. of the distance between the strikes. the idea being, if the stock really falls hard and fast, if it is up, that's quite a run. then i'm obviously mitigating my risk to the down side. the stock stays here, continues
to go higher the way it has been. i'm going to collect the premium. >> you like this trade, dan? >> i do like it. i like the aspect that the treasury is going to come out of their stake pretty soon. this is a very unlevered company and it seems like they are doing a lot of things really well. i like these sorts of trades. >> all right, got a question out there? send us a tweet, we'll answer it on our one-on-one web extra, that's right after the show. firstname.lastname@example.org and tonight, scott is teeing up a bearish bet on google. in addition to the web extra, you'll find great trader blogs, educational material and exclusive trades. you want to check it out. coming up next, taking a toll. a special look if rising rates will hit home builders like toll brothers. khouw and carter have got the trade. here's what's ahead on "options action." well, it's a hollywood hit. mike and carter made a bullish bet on dreamworks and now they are the toast of tinseltown. how can they make even more money? find out when "options action" returns. [ indistinct shouting ]
[ cows moo ] [ sizzling ] more rain... [ thunder rumbles ] ♪ [ male announcer ] when the world moves... futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with papermoney to test-drive the market. ♪ all on thinkorswim. from td ameritrade. welcome back to "options action." rising interest rates are all the talk in housing this week, as the average rate on the 30 year fixed mortgage jumped over the 4% mark. yes, that is still historically low, but it's the highest since april of 2012. it's also the biggest one-week spike since july of 2011. all that from the mortgage banker's association. take a look at what we've seen recently. the 30-year fixed jumped 17 basis points from last week to average 4.07%.
rates are up 48 basis points in the last four weeks. thanks to concerns that the fed will stop buying mortgage backed securities sooner than expected. it's current it will buying 85 billion a month in bonds and mbs, which has kept rates low for quite awhile. the higher rates took their toll on mortgage applications, re-fis down 15% to their lowest level since november 2011. they now make up just 68% of all mortgage applications. that share had been up in the high 80s when rates were lowest. this is not good news for the overall economy. re-fis helped juice consumer spending. next week, a new report from foreclosures. they had been trending lower but we will get a look at how each local market is faring. melissa? >> thank you very much, diane no surprise that concerns about rates and mortgage applications are hitting the home builders. the etf sliding 2% this week. with names like toll brothers and pull at this. so, are these stocks vulnerable to more declines?
let's call to the charts with carter braxton worth. what do you see? >> sure. it's a very serious subject. the backup in rates and the selloff in utilities. of course, homebuilders. so, let's look at toll brothers. one of the biggest. four charts, all the same time frame. this is the first one. this is one way you can draw the lines. a triple top that is forming. a bad formation signaling a reversal. if you look at the second chart, same time frame. this stock, if you want to draw the trend line this way, it's broke trend over two months ago. if you want to be more generous, look at the third chart. same time frame. draw the trend line a little less severe. we still broke trend within the last several weeks. or you can rely on the smoothing mechanism. it is now flat and turning over. so, home builders as a group were up 7% of the year. s&p up double that, 1415, something is going wrong and we know what it is. the change in rates. carter, thanks for that. >> mike, do you agree with carter? >> i definitely do. not just an issue of rates, but material and labor costs, as well. the home builders were
leveraging the fact that those had rose. since november, probably up 20% timber was. as they fuel the building boom, they have so start hiring and labor rates are going to go up, as well. take a look at valuation. that's where it gets silly. this is a company that was doing $6 billion in sales and had an enterprise value of 6 billion bucks before the credit crisis. it's doing $2 billion and it is worth $7 billion. had $4.80 in eps now, it's 74 cents. i ask you, what exactly are people thinking is going to happen? it looks expensive and they are nowhere close to what they used to do. they're doing a fraction of it. it's really hard to make a bullish case, i think, for a stock at this -- >> so, walk us through the trade. >> here again, something very similar to the other trade i was doing, now i'm doing a bearish bet. i'm selling the july 34, 36 call spread, sell them for $1.80 and buy the 36 for -- against it, basically -- i'm sorry. $1.80 and $1.
i'm collecting 80 cents. 40% of the distance between the strikes. again, stock just stays here, i'm going to collect, if it declines and my risk is limited if the housing stock rally gets reignited. >> scott, do you like this trade? >> i do. it looks a little bit like a counter trend trade to me and we would never get in a situation where we were risking a lot to make a little. mike's not doing that here. he's risking $1.20 to make 80 cents. i like that here. i think that payoff makes a lot of sense here. >> even bearish for a very long time. >> the momentum is broken here. i think carter's technical points are very good here, and mike on the fundamental front. it really hasn't mattered. it should start to matter at some point, especially if rates start to move. i think that's why this group is dead in the water. when you look at toll brothers, this stock is up 3% on the year, so, to me, i think investors are hip to it and i think this is a good trade. >> at the same time, this all really pivots around whether or not you believe the fed is going to taper or not taper and most on the street believe they're not going to taper any time soon. or it will happen later this
year. >> i think that's fair. and i subscribe to that same idea myself. but the fact is, it's gotten people focused on a little bit more. when enthusiasm switching to fundamentals is when people look at the valuations. this has been the catalyst for it. i think now they're saying, okay, even if they don't taper right now, it's still a space that's very stretched. coming up next, call it a dream come true. khouw and carter's dreamworks bet has played out like a true hollywood fairytale. is there more money left in this trade? find out when we come back. [ indistinct shouting ] ♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box.
welcome back to "options action." time now for the upside call. we take a look back on some of our winning trades. a few weeks back, khouw and carter teamed up for a blockbuster play on dreamworks. they risked a little, but made a lot. here's why. on "options action," it's how we wheel and deal like hollywood moguls. risk less so we can make more. and that's just what crow and khouw and carter did with their bullish bet on dreamworks. carter thought the stock had legs. >> make the bet they are going to turn the corner here. >> say, mike thought, this
carter guy's got a point. but just buying the stock? 100 shares would set mike back almost $2,000. so, to spend less, mike instead bought the june 20 strike call for 85 cents. now, to make money, mike needs dreamworks to rise above that strike price by more than that 85 cents he spent. or above $20.85 by june expiration. but do you really want to cough up 85 cents just to bet on dreamworks? >> no. definitely not. possibly no! >> neither do we. mike, let's do this for less. >> i'm going to sell the 22s against it. >> it's like easy money meets cheaper by the dozen. i love it. so, to cut the cost, mike sold the june 22 50-strike put and created his call spread. but he did something even better. he made the profits come quicker and here's how. between the 85 cents he spent on that lower strike call and the 25 cents he collected by selling that higher strike call, mike
has cut the total cost of his trade to just 60 cents. and now instead of needing dreamworks to trade above $20.85 to make money, mike now sees profits if dreamworks rises above $20 by more than the 60 cents he spent on the trade. or, above $20.60 by june expiration. >> thank you to you. >> well, let's not get too worked up, because there is a trade-off. and by selling that higher strike call, mike has capped his profits to the difference between the strike of the call he bought and the strike of the call he sold, minus the cost of the trade. and since the time in the trade, dreamworks shares have risen some 20%, making this trade a winner. and now, from spago to the chinese theater to the chateau marmont. all of tinsel town's hottest are whispering the same question. what will these two hollywood heavies do now? >> before we answer that, let's see how much money was made. had you bought dreamworks stock at the time of the trade, you'd be looking at a gain of 20%. mike bought his call spread for 60 cents and it can be sold for $2.
that's a return of more than 200%. carter helped get us in this trade so let's get back to him. carter, what do you see in the charts? >> the chart is still constructive. we would stay in, let it run, let it get extended. just stay and keep winning, if you will. >> keep winning, says carter braxton worth. mike? do you want to keep winning? >> i would love to. the thing is, with this call spread, we have run out of gas. and the reason is, the most the call spread can be worth is the differences between the strikes, $2.50. scott was telling me earlier he saw a $2.20 bid for this thing. here's the thing. if you are going to sell this thing, try to do it with a limit order at $2.20. i'd be a seller. take your profits and run. >> all right. our thanks to carter. coming up next, the final call from the options pits. [ indistinct shouting ] ♪ [ indistinct shouting ] [ male announcer ] time and sales data.
[ cows moo ] [ sizzling ] more rain... [ thunder rumbles ] ♪ [ male announcer ] when the world moves... futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with papermoney to test-drive the market. ♪ all on thinkorswim. from td ameritrade. talk about getting your goat. that crafty critter is called a
seroh, which is the goat's wild japanese relative, apparently. this one rammed his way into a northern japanese school this week and made himself at home at the deep end of a pool. the good news is it was empty. police weren't too sheepish about nabbing him with a net. but they let him go and that's what we call optional viewing. seroh. who knew? >> take your word for it. >> time now for the final call, which is, of course, the last word from the options pits. scott? >> this week's web extra is how to short google so you can use the proceeds to get long apple in front of the world wide developer conference. >> dan? >> cool. if you are long apple, you use elevated implied volatility to overlay against the long stock position to add yield. >> mike? >> i really like the apple trade. look for a lot of opportunities to do that. what's happened is, volatility that is the price of options, has gone up a little bit though it was down today. still higher than it was. people should be taking advantage of that by looking to sell premium here and there. that's what i would do. >> looks like our time has expired.
i'm melissa lee. thank you so much for watching. for more "options action," check out our website. optionsaction.cnbc.com. see you back here next friday, 5:30 p.m. eastern time for more "options action." meantime, don't go anywhere. "mad money" starts at the top of the hour. >> announcer: the following paid program is sponsored by great healthworks. the opinions and views expressed are those of the program's sponsor and do not necessarily reflect the opinions and views of cnbc. the following is a paid advertisement for omega xl. if you've been living in pain and you're tired of trying products that just don't work, you are not alone. today, 1.5 billion people worldwide are living in chronic pain. don't let pain deny you the life you deserve. join hundreds of thousands of omega xl users that have chosen